Cash Isas are more valuable than they have been in years, and not just because the rates on offer are generous.
Good rates are all well and good: but if they are lower than inflation, the value of your nest egg will still erode over time.
For years it was impossible to beat inflation, but today, according to rates scrutineer Savings Champion, 286 Isas pay more than 4 per cent – the rate at which consumer prices have risen over of the year preceding January.
This time last year, the best instant access Isa paid 3.01 per cent interest, so you would have earned £30 on £1,000 if you had left your money in the account last year .
However, the cost of goods has increased by 4% in the same period, so your savings will now only allow you to buy £991 worth of goods.
Inflation hero: There are currently 286 Isas paying more than 4% – the rate at which consumer prices rose in the year to January
Over the past ten years, inflation has averaged 3.44 percent per year. This means that £1,000 saved in 2014 would have had to grow to £1,400 by 2024 just to maintain the same spending power.
Even if we can beat inflation today, we still need to work on it.
Anna Bowes, of Savings Champion, says: “Of course there is a huge gap between the best rates and the worst, so it’s important to shop around. »
Although the best cash Isa rates pay well above inflation, there are many who still pay a pittance.
Ms Bowes says: “Lloyds Bank only pays 1.40 per cent on one of its accounts. On a £10,000 balance, inflation will erode the value of the cash over time in this low-paying account.
“After five years, assuming inflation remained at 4pc and you earned 1.4 per cent, although the balance would have increased to £10,720 including accrued interest, the real value after the effect of inflation would have fallen to £8,811.’
It is essential that you ensure that your savings are not gradually eroded by inflation by carefully choosing a home for your savings.
For example, if you had put your money into Isa, Moneybox’s market-leading instant access scheme, paying 5.11 per cent, your £10,000 would have earned £2,830 in interest and the real value – when you take into account inflation – would also have risen to £. 10,545.
This account accepts transfers from other Isas, so you can transfer any money that is in old Isas with low interest rates. It has a minimum opening balance of £500 and must be managed via an app.
If you’re happier with online banking, Virgin Money pays 5.06% on its Defined Access Cash Isa – but you can only make three withdrawals a year before the interest rate drops.
If you’re willing to lock your money away for 12 months, you can get a rate of 5.25% from Virgin Money.
If you commit to a fixed-term Isa, you’re likely to benefit from a lower interest rate than the best easy-to-access accounts.
Over the past ten years, inflation has averaged 3.44% per year. This means that £1,000 saved in 2014 should have grown to £1,400 by 2024, simply to maintain the same spending power.
This is because banks and building societies expect the Bank of England base rate to fall before the end of the period, so they do not want to be surprised by offering an interest rate significantly higher in the years to come.
However, if you don’t need to access your cash in the short term, a fixed rate cash Isa could be a great way to beat inflation.
This is because you can currently get rates that exceed the current inflation rate and are likely to significantly exceed inflation forecasts made by experts.
The Office for Budget Responsibility (OBR) currently expects inflation to fall on average to 2.2 percent this year and to 1.5 percent in 2025, before gradually returning to the target of 2 percent of the Bank of England.
Aldermore offers the highest three-year cash Isa at 4.5 per cent. If the OBR forecast proves correct, you could earn 4.5 per cent interest next year while inflation is just 1.5 per cent, equivalent to a real return by 3 percent.
Cash Isas tend to be much better at beating inflation than standard savings accounts.
Indeed, if you have a large sum in a savings account, you risk being taxed on the income you earn in addition to facing the ravages of inflation.
If you’re a basic rate taxpayer, you get a personal savings allowance of £1,000 a year.
In the past you didn’t really have to worry about paying tax on your savings because interest rates were so low that you had to have huge sums in the bank to earn more than £1,000 in interests.
But as interest rates have risen, just £20,000 in the highest-paying accounts would generate more than £1,000 in interest in a year.
Second, more and more of us are being dragged into higher income tax brackets due to frozen thresholds.
If you become a higher rate taxpayer, your savings allowance is halved, to £500. Additional rate taxpayers lose their allowance entirely.
This means you could start paying taxes on your savings income overnight.
Check out the best Cash Isa rates in our savings tables
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